The Executive Yuan on Friday announced that rules designed to prevent Taiwanese businesses from setting up subsidiaries in low-tax countries or territories to avoid their tax obligations in Taiwan are to take effect next year. The move is part of the government’s efforts to follow international trends of reining in corporate tax avoidance, and to honor the principles of fairness in taxation.
The rules regulating controlled foreign companies (CFCs) were launched in June 2016, namely as Article 43-3 of the Income Tax Act (所得稅法) and Article 43-4, which regulate the place of effective management of CFCs, along with Article 12-1 of the Income Basic Tax Act (所得基本稅額條例), launched in May 2017.
When the legislature in July 2019 passed the Management, Utilization and Taxation of Repatriated Offshore Funds Act (境外資金匯回管理運用及課稅條例), it also passed a resolution requiring that the Executive Yuan decide the effective date of CFC rules within one year of the expiration of the tax amnesty legislation on repatriated funds. That law expired in August last year.
Under the legislation, a Taiwanese company that directly or indirectly holds 50 percent or more of shares or capital of a foreign enterprise registered in a low-tax country or jurisdiction, or has a significant influence on such a foreign enterprise, is considered to be a CFC. Therefore, the earnings of the foreign entity are regarded as the Taiwanese parent company’s investment income, which must be included in the parent company’s taxable income. In other words, income generated from a CFC is deemed taxable regardless of whether there is dividend distribution to the Taiwanese parent company.
Not all CFCs are subject to the rules. There are exemptions. For instance, CFCs engaging in business operations in their registered jurisdiction, or those with annual passive income — such as dividends, royalties, rental income or gains from asset sales — of less than 10 percent of their total income or current-year earnings of less than NT$7 million (US$253,403).
The Ministry of Finance also plans to adjust the applicable minimum corporate tax rate, which is set at 12 percent and could be raised to 15 percent, according to regulations. Although its implementation needs reviewing, the effective date of a minimum tax system for Taiwanese enterprises should not be far from the date when the CFC rules come into force. It is also in response to the Organisation for Economic Co-operation and Development’s push for a global minimum tax of 15 percent on multinational corporations, which is to take effect next year.
The organization’s global minimum corporate tax applies to companies with annual revenue greater than 750 million euros (US$856.15 million) in two of four successive financial years. If the tax rate of a country or territory does not reach 15 percent, the government where the parent company is registered can make up the difference. About 160 Taiwanese corporations meet this criterion, the ministry said.
In the global fight against tax avoidance, it is increasingly difficult for corporations and wealthy people to take advantage of tax havens to avoid paying taxes. They should consider how to meet the requirements for exemption from CFC rules, for instance, by doing business in the country in which their foreign entities are registered, or adjusting their investment structure, profit allocation and transaction mode to mitigate the adverse impacts of the new rules.
Given the rapidly changing business environment worldwide, risk management and strategic deployment have become increasingly critical for corporations and wealthy people.
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